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People-Side Economics: Better Ways to Cut Inflation

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The Federal Reserve says workers must sacrifice bargaining power to cut inflation. Economist Robert Pollin says it’s not so. Here’s why.

Gloom shrouds the news on the economy. Workers get blamed for inflation and the common solutions on offer bring more pain. But when we center the interests of workers and communities, we get a different picture of the causes and cures for our economic woes. While wage increases can contribute to inflation, they don’t have to. Corporations can absorb higher wages by cutting profits or CEO salaries, for example. In fact, the increases in workers’ wages have barely brought them up to pre-COVID levels, while CEO pay and profits have increased exponentially. And there are other key sources of inflation such as energy prices and supply chain issues, that are more significant than wage increases.  

The Federal Reserve, usually presented as a gray eminence above the fray, actually plays out a distinct neoliberal agenda—one that sees higher unemployment as an aid in disciplining the workforce. Raising interest rates is far from the only answer to inflation. Investments in clean energy could help bring down fossil fuel prices, for example; targeted policy interventions could help un-kink the supply chain. And powerful people-centered movements could rein in corporate power.

Our new series, “People-Side Economics,” expands on these perspectives, exposing the bias and half-truths we hear every day, and bringing ideas we can use in organizing. In this first installment of the series, economist Robert Pollin of the University of Massachusetts-Amherst and the Political Economy Research Institute speaks with Convergence editorial board member Stephanie Luce.

Stephanie Luce: How can we make sense of what’s going on in the economy right now? Can you share some of your key insights to help organizers understand what is happening?

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Robert Pollin: Without exaggeration, I think it’s fair to say that it’s a unique moment. And I don’t like to use the word “unique” unless I really mean unique. I’m not exaggerating when I say “one of a kind, unique.” A significant part of that is due to COVID and the lockdown.

In February 2020, the official unemployment rate was 3.5%. By April 2020, it was 14.5%. And that is part of what constitutes the unique period––there was never anything comparable, this kind of labor market distress happening so quickly, and so intensively.

The other thing that makes it unique is that by July 2022, we’re back down to 3.5% unemployment. Whereas after the financial crisis, when unemployment went up to about 10%, where it had been around 3.5% right before the crisis, it took 10 years to get to 3.5%. And this time, it took a year and a half, and it was dropping dramatically.

Impacts of COVID Relief Policies

In that sense, we have to say that the macroeconomic policies that were enacted during COVID, for all their flaws, were a tremendous success. They were instrumental in preventing massive levels of suffering, and disruption. And who knows what would have happened to financial markets, if we had sustained a recession, at the level of 14.5% unemployment for more than six months, eight months instead of one month? So yes, we did enact extraordinary, unique macro policies in terms of fiscal deficit spending, and the Fed’s monetary policy bringing the interest rate down to zero and keeping it there. And they were successful.

So here we are now. Yes, this has created inflationary pressure––unexpected for me, and I would say unexpected for just about everybody.

We’re at an inflation rate back to where it was around 1980. The debate right now, in the macro world is, how can we cool off the economy without causing a recession? I don’t think that’s the right question.

Breaking Down the Sources of Inflation

First, we need to understand the sources of inflation. You can divide those into three distinct features: wages, energy prices, and supply chain disruptions.

Yes, nominal wages have gone up by about 5.1%. With 8.3% inflation, wage increases are contributing about half. But wage increases are slower than price increases, and prices are going up twice as fast as wages. So workers’ real wages are getting eroded. Wage increases are a partial cause at the best.

So what are the other factors? Coming out of COVID, all these supply chain disruptions are taking a long time to work themselves out, such as with the trucking industry and moving things off ports into the various markets. In the 1980s and 1990s trucking was a good job and now it isn’t because of deregulation, so yes––it is hard to fill the jobs. So the second big factor is general supply chain disruptions.

The third is energy. During COVID, the oil companies were running big losses, and their market value collapsed. They didn’t want to produce. For a while they were selling crude oil at negative prices, because they couldn’t give it away. So after the lockdown relaxed, they began to mark up their prices––which they can do because they have monopoly power––and there is an upswing in demand. Energy prices are going up by about 45%, which contributes about 3% to overall inflation.

So then we have the debate on what to do about it. The mainstream debate, including at the Fed, and including Harvard types like Larry Summers, are all saying, “We have to keep raising the interest rates to slow down the economy.” And that is a euphemism for attacking whatever gains workers have had. That’s all it is. They are quite explicit about it. The basic point being that workers have gotten too much bargaining power.

We have to keep raising the interest rates to slow down the economy.” And that is a euphemism for attacking whatever gains workers have had.

If we look at where wage increases have been largest, they’re in the hospitality industry, hotels and restaurants––places where people just were totally clobbered during COVID. So now you have wage increases of 8 or 9%, which maybe brings people back to where they were pre-COVID. Maybe. And nurses, and especially in nursing homes, where the jobs obviously were life-threatening. So to get people back, it took wage increases. Union wages are actually below the 4%––they are more in the range of 3%. Do workers have bargaining power?

The average nonsupervisory wage is basically at 1973 levels. If the average worker was making $50,000 in 1970, they are still making $50,000 in today’s dollars. That’s forty years of stagnant wages. Meanwhile, productivity has more than doubled, and the gains from productivity have gone to the rich. The average CEO in 1978 was making 33 times what the average worker was making, and in 2020 the average CEO was making 320 times the average worker’s pay.

The Larry Summers solution says, “We can’t run the economy if workers have any power.” It is the only way our economy can function. “We cannot change the distribution of income; it just can’t work.” It is basically saying we have no other tool.

What these people are saying is, “We have this mismatch. The official unemployment rate is about 3.5%, or 5.7 million people. And the vacancy rate is about 6 million people. So if there are six million vacancies, why should there be any unemployment?” And the Larry Summers of the world are saying, “It’s because these workers won’t take the jobs, because they don’t think they’re good enough. And therefore, we have to bust workers to get them back to taking these jobs.” And that’s the essence of the story.

I was looking at this piece that Summers put out just last month, and he’s saying that the Fed really thinks they can gently move workers into these jobs and weaken their bargaining power—but he, Summers, says it can’t be done gently: that you really have to smash workers. He doesn’t say these words, but that’s essentially what he means.

And the Fed has come around to the view that workers need to swallow this bitter medicine for the greater good of lowering inflation. Fed Chair Jerome Powell likes to call it a “softening of labor market conditions.” Powell’s assumption is that businesses will necessarily raise prices to offset modest wage increases, and those wage increases drive inflation. The Fed and most mainstream economists don’t take into account that businesses have been raising prices faster than wages have gone up.

To their credit, people in the Biden Administration have been trying to promote alternatives to rate hikes. They’ve been emphasizing “supply side measures” to control inflation, like an excess profit tax on oil companies and so forth. Larry Summers says it’s completely unscientific. But what is the science that says the job of economists is to defend neoliberalism?

SL: Can you explain for people why Summers’s solution of raising interest rates will clobber workers?

RP: If you raise interest rates, it costs more to borrow money to expand a business, to hire more people, to buy a car, to buy a house. And so people will do less of it.

We have all these super elaborate models, but that’s basically it––that raising the interest rate is the simplest tool to slow down spending.

SL: What are some of the other tools economists use?

RP: I wrote an article last year with Jerry Epstein, “The bailout economy.” Bailouts are central—you can’t have neoliberalism without bailouts. Which is ironic, because the operating premise of neoliberalism is, “let the markets rip, free market is the best.” Well, of course, they don’t really mean it. They mean, ‘”let the market rip when it’s beneficial for capital. And when capital overextends itself, over-speculates, when markets are spiraling downward, then we need government intervention to bail us out.”

A Better Way to Do Bailouts

The level of intervention during COVID was unprecedented. Extraordinary. And you could say, “well, that because that was COVID. That was the worst pandemic in 100 years.” But the second most extensive bailout was only a decade earlier. And that was strictly based on financial speculation over speculation. And before that, under Reagan, we had these massive bailouts relative to where the world had been. Bailouts are what makes the economy go. And bailouts are designed to protect the interests of capital.

Big corporations received billions of dollars during the lockdown with no strings attached. They weren’t even required to keep their workers on payroll. The Fed kept Wall Street afloat at the tune of $4 trillion.

We could think about bailouts that would be more egalitarian. You could just give people checks directly rather than giving billions to the banks.

Another way would have been public investment. For example, when the Obama administration took over General Motors to prevent its collapse, we could have kept it as a public enterprise and run it differently on nonprofit basis and competing with other auto firms.

During the COVID crisis, I wrote an article pointing out that the oil company’s valuation had gone down so much that the government could have bought the entire US fossil fuel industry for about one-tenth of what they were doing to bail out Wall Street. And then we would have had the foundation to transition out of fossil fuels.

But bailouts are used primarily to reinforce the power of capital and the neoliberal model.

Beyond Neoliberalism: Better Policy Solutions

SL: It’s a grim picture. What might be some better solutions we can organize around?

RP: If we deconstruct the 8.3% inflation, and we say roughly 4% is from wage increases, 3% energy, and 2% general supply chain issues. Here are some ways we can intervene in these three areas.

Supply Chains

I would say first, be very aggressive on the supply chain. For example, you know, getting the trucking sector, and the ports in Long Beach, operating at 100%. Use industrial policy to accelerate ways to get supply chain bottlenecks taken care of, such as the manufacture of chips used in cars. That might take 6-8 months to resolve but the interest rate path takes that much time anyway, to get prices down. So maybe with the diffusion of supply chain prices we can get inflation down from 9% to 6%.

Energy Prices

Then, with the energy prices, my view is that it is good that fossil fuel prices are high, for climate crisis reasons. It’s not the way I would have wanted them to get high. We don’t want them lower but I don’t want people to suffer. So the windfall profit tax in Congress was to tax the oil companies and just give the money to people, to accelerate the transition to clean energy. Clean energy prices are lower than fossil fuel prices. So if we accelerate investments in efficiency and clean energy, that can get the fossil that energy prices down.


Let’s say we have 4%, average wage increases. We can live with that. There’s no evidence that there is any real difference between a 2% aggregate inflation rate and a 4% aggregate inflation rate, in terms of economic growth. Where did we get the 2% inflation target? It was just kind of made up.

The real issue is the distribution of income. Over time, in a non-neoliberal world, if workers get the benefits of productivity gains, and if workers’ wages rise, for example, a half a percentage point faster than productivity to compensate for the losses that they experienced during neoliberalism, I think that’s a relatively stable model. It would generate predictable rates of inflation, maybe it would be 3%. And that’s okay.

That model more or less replicates what was called the Swedish wage earner model, developed in the 1960s and 1970s by Rudolph Meidner, the great union economist in Sweden. I think it’s still the best model out there. And, you know, Meidner was not a big proponent of heavy macro interventions. To lower the unemployment rate, he would say, let’s have an overall wage productivity compromise. The question is, where do we set the compromise? He would say, I believe that wages should rise in concert with productivity. But that’s not reasonable now, since we’ve had 50 years in which wages have been flat and productivity has doubled.

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